The "Magnificent Seven" group of stocks has been a powerhouse in the market since the start of 2023, with all of them beating the S&P 500. It includes:
- Microsoft
- Apple
- Nvidia
- Alphabet (GOOG -0.83%) (GOOGL -0.84%)
- Amazon (AMZN 0.97%)
- Meta Platforms (META 2.18%)
- Tesla
This collection has had a strong run, but not every one of them is a strong buy right now, in my opinion. Nearly every one of these companies has artificial intelligence (AI) aspirations, but my reason for buying three of the seven stocks is centered around a much older practice: Advertising.
Advertising is a massive industry
If advertising is my reason to buy some of these stocks, then Alphabet, Amazon, and Meta Platforms are the ones I'm talking about. This trio generates a massive amount of revenue each quarter from advertising.
| Company | Q4 Advertising Revenue |
|---|---|
| Alphabet | $65.5 Billion |
| Meta Platforms | $38.7 Billion |
| Amazon | $14.7 Billion |
Data sources: Alphabet, Meta Platforms, and Amazon.
While Alphabet and Meta are leaders in this category, some may be surprised that Amazon is also heavily involved in the ad marketplace. In fact, advertising services were Amazon's fastest-growing segment in the fourth quarter, increasing 27% year over year.
Meta's ad division also put up solid growth figures in Q4, with its ad revenue rising 24% year over year. Alphabet was the laggard of the trio, but this also makes sense due to its sheer size. It delivered an 11% growth rate in Q4.
So why are these growth rates a big deal? Well, if you rewind the clock to this time last year, these rates weren't nearly as impressive (besides Amazon). The ad market struggled in early 2023 due to fears of a recession. When businesses are concerned about a potential economic downfall, they save on whatever expenses they can. One of the easiest places to trim is ad budgets, which negatively affects businesses like Meta and Alphabet, which are highly concentrated in this industry.
However, the fear of imminent recession has subsided, so businesses are happy to begin increasing their ad budgets. This is why ad-heavy companies like Meta and Alphabet have seen success recently.
Amazon is a different story, as their ad revenue growth never dipped like Alphabet's or Meta's. This is likely due to the relatively young age of Amazon's ad business and that it's still working on building out its capabilities. When this segment matures, it will likely display the cyclical trends that the other two do, but it's in full growth mode right now.
With the ad market improving each quarter, all three companies stand to benefit, making them excellent buys.
The stocks are still attractive buys
In addition to a recovering ad market, these three are some of the most attractively priced Magnificent Seven stocks. My valuation metric of choice for Alphabet and Meta is the forward price-to-earnings (P/E) ratio, as the trailing 12 months used in the more common trailing P/E ratio still includes some quarters where the ad business was down. If you use this metric, it's clear these two are fairly priced.
GOOGL PE Ratio (Forward) data by YCharts
We can use Amazon's forward P/E (it's at 44), but that isn't fair to the business as portions of the company (like its international commerce division) aren't profitable and aren't expected to become fully profitable for some time. As a result, I'll use the price-to-sales (P/S) ratio to value Amazon.
AMZN PS Ratio data by YCharts
From this perspective, Amazon still has a way to go before being valued at the same levels as 2018 through 2021. So, investors can confidently buy the stock, knowing that it still isn't back to historical valuation norms.
Advertising is a great business to be in right now, which makes this trio a fantastic pick in 2024.
